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Reverse Mortgage Myths: Get the Facts

by Gina Pogol
Money Rates Columnist
August 19, 2009


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Reverse mortgages are some of the most poorly understood financial products around. Here are some of the most common reverse mortgage myths--debunked and demystified.

Reverse Mortgage Myths - Get the Facts about Reverse Mortgages

Have you considered a reverse mortgage for additional income but been scared off by concerns about qualification criteria, tax implications, or even scams or possibly losing your home? Read on to separate reverse mortgage facts from fiction.

Reverse Mortgage Myth: The IRS Can Tax My Reverse Mortgage Income

The proceeds from a reverse mortgage can be taken in several ways--as a lump sum, payments for life (tenure), payments for a specific number of years (term), a line of credit, or a combination of these. But which options create an income tax burden? Answer: none of them!

Reverse Mortgage Truth: Income from Reverse Mortgages Isn't Taxable

That's because technically a reverse mortgage payment isn't really income--it's the proceeds from a loan and will be repaid someday. So income from your reverse mortgage goes further than income from other sources. For example, if you take a part-time job to supplement your retirement income and you are in a 33% tax bracket, $2,000 a month becomes $1,340 a month. But $2,000 a month from a reverse mortgage is not taxable, and you get the full benefit of your money. So by all means, take that part-time job if it fulfills you. Just keep in mind that a reverse mortgage can provide more money with less effort.

Reverse Mortgage Myth: I Need Income and Good Credit to Qualify

It's tough being retired and on a fixed income. Many don't have enough income to qualify for a home equity loan, and the economy may have battered their credit ratings as well. That's no problem with a reverse mortgage.

Reverse Mortgage Truth: You Can Qualify for a Reverse Mortgage with Bad Credit and No Income

Because you don't have to make mortgage payments, your credit history and income are irrelevant to a reverse mortgage lender. And borrowers with bad credit don't pay higher interest or fees than those with perfect credit.

Reverse Mortgage Myth: A Reverse Mortgage Can Make Me Ineligible for Government Programs

Seniors getting needs-based assistance such as Medicaid may be concerned that the extra income from a reverse mortgage could make them ineligible. That's not generally the case.

Reverse Mortgage Truth: Reverse Mortgages Don't Have to Affect Government Programs

Regular income from reverse mortgages isn't technically income, so it doesn't make you ineligible for government programs. However, taking your proceeds in a lump sum--if you don't spend it all immediately--can increase your assets to the point where you wouldn't qualify for certain programs. Ask your reverse mortgage counselor about the best way to take your proceeds if this is a concern.

Reverse Mortgage Myth: I Could Get Evicted from My Home

Seniors have visions of running through all of their home equity and then being kicked out of their homes. In fact, a reverse mortgage is about the surest way of remaining in your home. You don't have to make payments, and all you have to do is maintain the property and pay your property taxes and insurance.

Reverse Mortgage Truth: You Can Stay in Your Home as Long as You Like

Even if you select a payments-for-life (tenure) option and your loan balance exceeds your property's value, you cannot be evicted, and you don't have to repay more than the home's value.

Reverse mortgages aren't for everyone, but they are optimal solutions for many. In fact, CNNMoney.com suggests that seniors look into reverse mortgages if they have credit or cash flow problems, and a survey by AARP indicates that over 90% of seniors who took out reverse mortgages were glad they did. Maybe you could be one of them.

Gina Pogol
Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte. She graduated with High Distinction from the University of Nevada with a BS in Financial Management.

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